ASX 200 Analysis: Fed Influence on Santa’s Rally Timing Explained

ASX 200 Market Outlook: December's Potential Rally

On Tuesday, a significant bullish reversal candle took shape in the ASX 200, prompting speculation about the onset of a Santa rally. The upcoming FOMC meeting, however, introduces a cloud of uncertainty. If the Fed provides a more hawkish message than anticipated, the chances of a market rally diminish. The fear is that if the Fed alters their projections for rate cuts in 2025 to indicate one or none, we may see the ASX retest the downside target of 8200 that was highlighted in my previous analysis. Nonetheless, there is a possibility that the Fed will maintain a less aggressive stance than the market expects, primarily to project a sense of stability. A 25 basis point cut appears unavoidable; if they reiterate the likelihood of at least two cuts in the coming year, this could set the stage for a rebound in line with December’s seasonal tendencies. Conversely, a hawkish tone could mean further declines for the ASX before the anticipated late-December rally materializes next week. In summary, I remain optimistic about the prospect of a Santa rally. The outcome of the Fed meeting will determine if this rally kicks off on Thursday or the following week.

December Seasonality of the ASX 200

Historically, the ASX 200 exhibits a bullish bias during December, particularly from mid-month. Average daily returns are generally positive from December 16th through December 30th, alongside a win rate exceeding 50%. However, traders often take profits on December 31st, resulting in a negative average return and win rate on that day.

Technical Analysis of ASX 200 Futures (SPI 200)

A notable bullish engulfing candle emerged on Tuesday, suggesting a potential swing low. Much hinges on the Fed's hints regarding their rate cut strategy for next year. If they indicate a future of two or more cuts, the market may rally post-FOMC. The daily RSI has shown extreme oversold conditions before moving upwards, indicating that the low might have already been established. However, a bearish divergence was observed on the hourly chart just below the weekly R1 pivot, leading to a slight retracement. The outlook is to seek buying opportunities within Tuesday’s trading range, anticipating a breakout above Tuesday's highs. A target of 8450 seems plausible in the typically low-liquidity conditions as the year concludes.

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